CPI – Too Hot to Cut

Another stronger than needed inflation print should continue to give the Fed pause that they are going to achieve the last mile of bringing inflation back down to 2% after they have so foolishly allowed financial conditions to ease over the past 4+ months, a self-defeating measure that has only made their job more difficult.

Labor market isn’t slowing rapidly enough here to warrant attention while inflation has been re-accelerating for the last 4+ months. Supercore inflation up 47bps mom is annualizing levels far higher than the Fed can be comfortable with.

It only takes two members to move their dots from 3 cuts to 2 cuts to bring the median dot up for 2024. That seems like a layup now as I expect we will see a continued shift higher in the dot plot for both 2024 and 2025 next week with the possibility of higher neutral rate assumptions as well.

The Fed is being forced to push out the timeline toward providing more liquidity in this stagflation environment. If they agree, then risk assets will finally start to take a hit. If they fail to agree, and continue to believe they can ease this year, risk asset markets will continue to rally until inflation expectations and actual inflation rise enough to make them uncomfortable enough not to ease. The choice is theirs next week.